The IRS generally has three years to examine a return and assess additional taxes after it has been filed.
This can put pressure on whether what was filed is a “return.”
I am looking at a case involving this issue.
Mr Quezada (Q) ran a stonemasonry business. He had a number of people working for him over the years. Like many a contractor, he treated these individuals as subcontractors and not employees.
He filed Form 1099s.
Most of these 1099s did not include social security numbers.
This is a problem. If a payor requests a social security number and an individual refuses to provide it, the tax Code requires the payor to withhold “backup withholding.” The same applies if an individual provides a bogus social security number.
Say that you are supposed to pay someone $1,000 for stone masonry work, but they refuse to provide a social security number.
COMMENT: Let’s be honest: we know what is going on here.
You are required to withhold 24% and send it to the IRS. You should pay the person $860 and send $240 to the IRS.
QUESTION: what are the odds that anyone will ever claim the $240?
FURTHER QUESTION: And how could one, since there is no social security number associated with the $240?
Mr Q was supposed to file the following forms with the IRS:
· Form 1099
· Form 1096 (the summary of the 1099s)
· Form 945 (to remit the $240 in our example)
He filed the first two. He did not file the third as he did not withhold.
Mr Q filed for bankruptcy in 2016. The creditors had a chance to file their claims.
In the spirit of bayoneting the dead, the IRS wanted backup withholding taxes from 2005 onward.
It filed its claim – for over $1.2 million.
QUESTION: how could 2005 (or 2006? or 2007?) still be an open tax year?
The IRS gave its argument:
1. The liability for backup withholding is reported on Form 945.
2. Mr Q never filed Form 945.
3. The statute of limitations never started because Mr Q never filed the return.
The IRS was alluding to the Lane-Wells case.
In Lane-Wells the taxpayer filed one type of corporate tax return rather than another, mostly because it thought that it was the first type and not the other. The distinction meant money to the IRS.
The Supreme Court agreed with the IRS.
The IRS likes to consider Lane-Wells as its trump card in case one does not file a return, unintentionally leaves out a schedule or files the wrong form altogether. The courts have fortunately pushed back on this position.
Mr Q had a problem. He had not filed Form 945. Then again, from his perspective there was no Form 945 to file. He was between a rock and a hard spot.
The Appeals Court hearing Mr Q’s case realized the same thing.
The Court reasoned that the issue was not whether Mr Q filed the “magic” form. Rather, it was whether Mr Q filed a return that:
· Showed the liability for tax, and
· Allowed calculation of the amount of tax
Here is the Court:
The IRS could determine that Q[uezada] was liable for backup-withholding taxes by looking at the face of his Forms 1099; if a particular form lacked a TIN, then Q[uezada] was liable for backup withholding taxes applied to the entire amount …”
There is the first test.
For each subcontractor who failed to supply a TIN, the IRS could determine the amount that Q[uezada] should have backup withheld by multiplying the statutory flat rate for backup withholding by the amount Q[uezada] paid the subcontractor.”
There is the second test.
The Court decided that Q had filed returns sufficient to give the IRS a heads-up as to the liability and its amount. The IRS could but did not follow up. Why not? Who knows, but the IRS was time-barred by the statute of limitations.
Our case this time was Quezada v IRS, No 19-51000 (5th Cir. 2020).